Loan Against Shares

It is advisable to take loan against equity (shares & debentures) only when you are expecting a certain sum of money a few months down the line and you need some funds in the interim. If you are reinvesting the loan amount, ensure that the benefits you derive are more than the cost you have to incur (which includes interest and a processing fee). And consider carefully the risk involved in such a move.

The loan is available in the form of an overdraft facility against the pledge of financial securities like shares/units/bonds. After you submit the loan application with all the share certificates and other relevant documents, a current account is opened in your name. You can then withdraw up to the amount sanctioned and interest will be charged only for the number of days you use the amount.

The loan amount that can be sanctioned depends on two factors: the extent of funding on a particular stock and the price (called the base price) considered by the lender for calculating the value of the shares. The Reserve Bank of India (RBI) allows banks to lend up to 75 per cent of the value of demat shares and 50 per cent of the value of physical shares. But banks can, and do, fix their own limits with respect to the extent of funding within that range.

Generally, demat shares get you a larger loan amount in faster time, at less rate of interest and at smaller processing fee. Every lender has an approved list of securities that he lends against and this list varies from lender to lender. There are other conditions that lenders apply on equity loans.